Sun Healthcare cuts outlook after Medicare changes

Shares of Sun Healthcare Group Inc. fell Friday after the company lowered its annual profit and revenue estimates because of cuts in Medicare and Medicaid payment rates.

The cuts will reduce payments to nursing home operators by 11.1 percent. The changes were announced earlier this year. They go into effect Saturday. Sun Healthcare said it now expects to earn between 83 cents and 94 cents per share in 2011 on $1.93 billion to $1.95 billion in revenue.

The company had previously forecast a profit of $1.30 to $1.45 per share on revenue of $1.95 billion to $2 billion. Analysts had expected the company to report a profit of $1.05 per share and $1.94 billion in revenue, according to FactSet.

Sun Healthcare said it will also take a "material" goodwill charge in the third quarter.

The company said the changes in payment rates will reduce its earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs by $15 million in the fourth quarter. Changes in group therapy and change-of-therapy provisions will reduce those earnings by $10 million to $12 million.

Sun Healthcare said it is starting a cost-cutting initiative in response to the Medicare changes, and after those actions, the Medicare changes will reduce its 2011 earnings by $22 million to $23 million.

Most of the cost cuts will take effect in 2012, and the company said that including the cost cuts, the payment and therapy changes will reduce its 2012 earnings by $45 million to $50 million.

Shares of Sun Healthcare lost 21 cents, or 6.8 percent, to $2.87 in morning trading.